Chapter #1 Introduction to Auditing

Q : Discuss the need and Origin of Audit? And Define Auditing.

Origin Of Audit:
The word Audit is derived from Latin word “Audire” which means “to hear". It is difficult to say as
to when the “Audit” was originated, however we can study its various stages of evolution as
described below.
1) Introduction of checking of errors and frauds:
When the business activities were still in crawling state and even money was not invented and Barter
System was followed then the monarchs and merchants appointed prudent and honest persons to
locate frauds, defalcations, defects and mistakes/errors in their financial states of affairs
(Accounts).
2) Introduction of Double Entry System:
In 1494 LUCA PACIOLI published a book on Double Entry System in which an advanced
authenticated system of Book Keeping was introduced to start proper recording of accounting
transaction in account books. In his book the author also described the duties and responsibilities of an
auditor.
3) Evolution of Audit in 15th century:
In this century auditors were appointed to check the accounting records of stewards of estates,
domains and manors (Egyptians, Greeks and Romans).
4) Evolution of Audit after industrial Revolution 1750-1800:
Large number of industries/factories were established in European countries during this period
which adopted division of labour and started large scale production producing lots of
goods/products. Thereby medium sized businesses (sole proprietorships) were developed into
partnerships followed by formation by ownerships like companies of various kinds, industrial
states and empires. For proper recording correct accounts of receipts and payments they
entrusted the checking of financial records to experienced professionals who came to be known as
Auditors. They offered their opinions (reports after checking the financial accounts of their clients
which was called Auditing.
5) English Companies Act 1862:
When need of proper accurate and free form errors accounts became absolutely necessary then
recognizing the need of time the work of Auditing was officially recognized by enforcement of
English companies Act 1862.
6) Indian Companies Act 1913:
For India when this Act was enacted the audit of companies Accounts became compulsory in which
for the first time following other things were described:
➢ Qualifications of auditor,
➢ Duties of auditor,
➢ Rights of auditors and
➢ Appointment of auditors.
7) Post-independence Evolution of Audit in Pakistan:
Auditing remained in abeyance in Pakistan since 14th August 1947 to 1959.
8) Chartered Accounts Ordinance 1961:
This act was passed and the Institute of Chartered Accounts of Pakistan (ICAP) was established which
was made independent later. Till that time the Federal government controlled the work of Audit of
companies.
9) Companies Ordinance 1984:
When the Ordinance was issued it strengthened the work of Audit in Pakistan.
10) Income Tax Ordinance 1979:
According to this Ordinance the audit of certain type of income tax assesses had been made
compulsory. Thus the Auditing profession is now effectively functioning in Pakistan.